Beaufort Analysis No.243 – Is inflation knocking the wind out of growth?

Despite expectations of a rise, the UK’s Consumer Price Index (CPI), the key measure of inflation, remained at 2.6% in July; falling fuel prices were offset by small increases in food, clothing and household goods. In its latest report, the Bank of England stated that it expected inflation to climb to 3% by the end of 2017 as the weak pound, following the vote to leave the EU, has raised the cost of imports. However, this moderating of the rate of inflation has signalled a delay in the raising of interest rates, and this was evident by the 6-2 vote by the Bank’s Monetary Policy Committee to leave rates unchanged in its August meeting. In normal circumstances, inflation of 2.6% would likely lead to an increase in interest rates as the Bank strives to maintain its target of 2%, but it is mindful of the slowing UK economy and believes the recent spike in inflation is only temporary.

Unemployment in the UK fell 57,000 in the three months to June, bringing the jobless rate down to 4.4%, its lowest since 1975. Also, partly due to the increased State pension age, the proportion of people in work is now 75.1%, its highest since 1971. At the same time, average weekly earnings have increased by 2.1% year-on-year, meaning that with inflation at 2.6%, the squeeze on real incomes continues to grow, albeit at a slower pace. Annual house price growth has slowed for the third consecutive month, with an average rise of just 0.8% from May to June, however there remains disparity between different areas of the UK with house prices in London now falling.

In the markets, the FTSE 100 recovered during the first half of the week, after reaching a 3-month low the previous Friday; both the FTSE 100 and the FTSE 250 index rose 1.6% in the first three days as political tensions between the US and North Korea abated. However, those gains were mostly wiped out during Thursday and Friday. On Thursday, the US indices fell amid increasing concerns over the Trump Administration’s ability to push through its economic agenda on tax cuts and infrastructure spend. Both the Dow Jones Industrial Average and the S&P 500 recorded their biggest daily percentage falls in three months while the Nasdaq Composite fell 1.94%, its third largest drop of the year. Also, the dreadful events in Barcelona weighed on the markets as terrorism once more unfortunately takes the headlines.